Aiming to accelerate quality improvement, payers are increasingly applying value-based purchasing strategies to surgical care. Among the largest of these efforts, the Center for Medicare and Medicaid Services (CMS) has recently launched a broad-based pay-for-performance plan for cardiac and other types of inpatient surgery in the elderly. To date, this effort has aligned incentives exclusively around various measures of hospital quality. It is essential, however, that hospitals be accountable for their costs as well as quality. Surgery accounts for almost half of total inpatient spending in the Medicare population. DRG payments for routine care, paid under the prospective payment system, account for a large portion of overall expenditures. However, our pilot studies suggest that poor quality and/or expensive practice styles may add as much as 50% to overall spending for inpatient surgery. Wide variation in such costs across hospitals implies considerable room for improvement. A better understanding of surgical spending and hospital-specific cost measures could be invaluable for reforming payment systems and fostering accountability. In this context, our proposal has three specific aims: I. To identify the major components of surgical costs. Using contemporaneous Medicare claims data, we will first identify the major contributors to surgical payments for several common, expensive inpatient procedures. We will examine payments related to the index hospitalization and for care after discharge, including unbundled physician and hospital payments, home health, rehabilitation centers, and skilled nursing facilities. II. To better understand variation in surgical costs across hospitals. In examining variation in payments across hospitals, we will explore the extent to which high surgical payments reflect poor quality, expensive practice styles, or both. III. To develop and validate hospital-specific measures of surgical cost. We plan to develop and validate risk-adjusted, price-standardized measures of surgical payments for hospitals performing each procedure. This proposal has obvious policy relevance and immediate applicability to CMS'pay for performance and public reporting programs in surgery. It also further develops the broader research themes represented in the 3 projects comprising the NIA-funded Program Project grant, "Causes and Consequences of Health Care Efficiency."